These are interesting times. We have the elections in a few days. We have the possible expiration of the Bush era tax cuts in about sixty days. What is at stake and what might happen? Although you might think the estate tax is only for the very wealthy and could never apply to you, be careful. With changes that are set to take effect January 1, 2013, the estate tax could very well affect you.
Presently, the federal estate, gift and generation skipping transfer tax exemptions are at $5,120,000 per person and the rate of tax for estates over the exemption amounts are 35%. However, effective January 1, 2013, the federal estate and gift tax exemptions are scheduled to revert back to $1,000,000 per person. The generation skipping transfer tax exemption will revert back to 2001 levels indexed for inflation which means $1,400,000 per person. The rate of tax will go back to 55%. The reason for all this is that the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) was set to sunset January 1, 2011. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“TRUIRJCA”) increased the exemptions to $5,000,000 and extended the sunset by two years so that it is now set to expire January 1, 2013.
According to LIMRA, an insurance marketing firm, an estate tax exemption amount of $1,000,000 could affect 12.5% of all households in the United States. That is 1 in 8. When considering the estate tax exemption amount of $1,000,000, the value of your personal residence, business, retirement accounts, life insurance (without proper planning), and other assets are included in the calculation.
Depending on who is President and who controls Congress, one of four things is going to happen between now and the first part of 2013.
The first possibility is that Congress does nothing and TRUIRJCA and EGTRRA expire and the estate, gift and generation skipping transfer taxes revert back to 2001 levels. In my opinion, this is a very real possibility given President Obama and Vice President Biden’s comments. Even if Congress passes a bill to extend the exemption amounts further, would President Obama sign it? If President Obama is not re-elected, why would he sign an extender bill? If President Romney is elected and the democrats retain the Senate, will the Senate bring the matter up for a vote after Romney is sworn in?
The next possibility is that EGTRRA and TRUIRJCA are extended for another period of time. For how long? Who knows? If the current law is extended, the exemption amounts would increase by the indexed inflation amount unless modified in the new bill. The same political issues are present with the extender possibility.
The next possibility is that the President and Congress reach some sort of agreement or compromise. The compromise would likely apply to the exemption amount and the rate of tax. But at what amounts? I see this as a real possibility no matter who is President or who controls Congress. A possible scenario would be the lowering of the estate, gift and generation skipping transfer tax exemptions amounts and an increase in the rates of tax in exchange for a reduction in the income tax rates that are also set to go up. Many more are set to be effected by the income tax changes that are coming than the estate tax changes so a compromise could be reached on that basis. Of course, this would require a compromise and for the last couple of years Congress and the President have not shown an ability to compromise on anything.
Another possibility is that the estate, gift and generation skipping transfer taxes are totally repealed. This would require the Republicans sweeping the Presidency, Senate and House and the matter brought up for a vote. I find this highly unlikely.
So what should you do? What does the crystal ball show? No matter what, you should have your basic estate planning documents in place for no other reason than to avoid the probate process. Whether or not you are in need of additional advanced estate planning to deal with the estate tax depends on many different factors. To properly evaluate those various factors, you should consult with an attorney qualified to advise you regarding the estate, gift, and generation skipping transfer taxes.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Estate Planning, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com
